ii view: Nvidia flags exceptional demand

It has been a tough year so far for tech stocks, but is this a buying opportunity at the chip maker? 

Fourth-quarter results to 30 January

• Revenue up 53% to $7.64 billion
• Adjusted earnings per share up 103% to $1.18
• Cash dividend of $0.04 per share

Founder and chief executive Jensen Huang said:

“We are seeing exceptional demand for Nvidia computing platforms. Nvidia is propelling advances in Artificial Intelligence (AI), digital biology, climate sciences, gaming, creative design, autonomous vehicles and robotics – some of today's most impactful fields. We are entering the new year with strong momentum across our businesses.”

ii round-up:

US computer chip maker NVIDIA (NASDAQ:NVDA) reported strong demand for its products as sales for its data centre, gaming and graphic chips all hit quarterly records. 

Sales for the three months to the end of January surged 53% year-over-year to $7.64 billion, beating Wall Street expectations nearer to $7.4 billion. Sales for the full year 2021 hit a record $26.91 billion, up 61% compared to 2020. 

Nvidia shares drifted lower following the results having gained by more than 55% over the last year. Shares for US chip rivals AMSL and Broadcom (NASDAQ:AVGO) are both up by under 20% over that time. All three companies are down over 10% year-to-date. The tech-heavy Nasdaq Composite index is down around 1%. 

Sales for Nvidia’s data centre chips rose 71% from the year-ago quarter to $3.26 billion. Many of its chips are now used to operate cloud-based voice recognition services. Meta (NASDAQ:FB), formerly Facebook, is now to use its chips in an AI research project. Other data centre partners include Microsoft (NASDAQ:MSFT). 

Revenue for its gaming-related products climbed by just over a third year-over-year to $3.42 billion. Annual sales hit another record of $12.46 billion. Quarterly demand for its graphic chips more than doubled compared to the final quarter of 2020 to $643 million.

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In early February, Nvidia withdrew from buying chip designer ARM Holdings due to significant regulatory challenges. It now intends to record a charge for the write-off of a prepayment for ARM in the first quarter of fiscal 2023. Management expects revenue of $8.1 billion for the quarter.

ii view:

Nvidia was started in 1993. Today, its products are touching on areas from gaming, cloud computing, AI and robotics, to self-driving cars, genomics and cryptocurrency mining. Nvidia’s US stock market value now sits above household names such as JPMorgan (NYSE:JPM), Visa (NYSE:V) and Walmart (NYSE:WMT). 

For investors, some disappointment regarding what might have been if it had been allowed to acquire ARM seems natural. Government concerns regarding the power of major tech companies has clearly featured and is not likely to go away. The debate regarding appropriate tech valuations also continues and is now set against the tougher backdrop of expected higher interest rates - a major factor in the Nasdaq Composite’s year-to-date fall of more than 10%. 

But demand for Nvidia’s products is evident, with new sales records regularly being achieved. An expanding array of arenas using its products, which have evolved from a previous core gaming focus, is not to be overlooked, while a dividend payment, if only very small, continues to be paid. For now, and with the consensus analyst estimate of fair value stood at over $330 per share, room for long-term optimism persists. 

Positives: 

• Record sales
• Exposure to growth in gaming and data centres

Negatives:

• Purchase of ARM blocked by regulators
• Rising interest rates historically bad for tech valuations

The average rating of stock market analysts:

Buy